Rent-A-Center Earnings Preview

Jul.22.11 | About: Rent-A-Center Inc. (RCII)

Rent-A-Center Inc. (NASDAQ:RCII), one of the largest rent-to-own operators in the U.S., is scheduled to report its second-quarter 2011 financial results on Monday, July 25, 2011. The current Zacks Consensus Estimate for the quarter is 72 cents a share. For the quarter under review, revenue is $702 million, according to the Zacks Consensus Estimate.

First Quarter 2011, a Synopsis

On April 25, 2011, Rent-A-Center delivered lower-than-expected first-quarter 2011 results. The quarterly earnings of 79 cents a share missed the Zacks Consensus Estimate of 85 cents, but increased 2.6% from 77 cents registered in the prior-year quarter.

The quarterly earnings also failed to meet management’s guidance range of 82 cents to 88 cents a share. On a reported basis, including one-time items, earnings came in at 69 cents a share, down 10.4% from 77 cents earned in the year-ago quarter.

Rent-A-Center’s total revenue, which comprises store and franchise revenues, grew 3.3% to $742.2 million from the year-ago quarter, attributable to higher revenue from the RAC Acceptance business, partially offset by the discontinued financial services business. However, total revenue fell short of the Zacks Consensus Estimate of $753 million. Comparable-store sales for the quarter came in at 0.1%.

Second Quarter and Fiscal 2011 Guidance

Management now expects second quarter 2011 earnings in the range of 68 cents to 74 cents a share. Total revenue is expected in the range of $694 million to $709 million. Rent-A-Center projects comparable-store sales in the range of flat to 1%.

The company has predicted total store revenue in the range of $687 million to $702 million. Store rental and fee revenue is estimated in the range of $619 million to $629 million.

Management reiterated its fiscal 2011 guidance. Earnings are projected between $2.90 and $3.10 per share. Total revenue is expected in the range of $2,868 million to $2,928 million. Management expects comparable-store sales between 1.5% and 2.5%.

Total store revenue is projected between $2,835 million and $2,895 million. The company anticipates store rental and fee revenue between $2,477 million and $2,527 million.

Second Quarter 2011 Consensus

Analysts considered by Zacks expect Rent-A-Center to post second-quarter 2011 earnings of 72 cents a share, which remains flat in terms of year-over-year growth. The current Zacks Consensus Estimates for the quarter range from a low of 70 cents to a high of 74 cents.

Zacks Agreement and Magnitude

Of the 10 analysts following the stock, none of the analysts revised their estimates either upward or downward in the last 30 or seven days, keeping the current Zacks Consensus Estimate unchanged at 72 cents a share.

Mixed Earnings Surprise History

With respect to earnings surprises, Rent-A-Center has topped as well as missed the Zacks Consensus Estimate over the last four quarters in the range of negative 7.1% to positive 12.7%. The average remained at 4.4%. This suggests that Rent-A-Center has beaten the Zacks Consensus Estimate by an average of 4.4% in the trailing four quarters.

Rent-A-Center Holds Zacks No. 2 Rank

Currently, we have a "Neutral" rating on the stock. However, Rent-A-Center holds a Zacks No. 2 Rank, which translates into a short-term "Buy" recommendation.

Rent-A-Center leverages an extensive network of approximately 3,000 stores to effectively penetrate into its target markets, and gain a competitive advantage over its competitors, such as Aaron’s Inc (NYSE:AAN) and Advance America.

The company is taking prudent steps to optimize rental merchandise levels in accordance with the sales trends. Rent-A-Center has implemented a centralized inventory management system, including automated merchandise replenishment and a new centralized purchasing system that allows it to better manage its rental merchandise.

In an effort to enhance the company's financial flexibility, lower its interest expenses and focus on future growth prospects, Rent-A-Center has completed refinancing its senior credit facility. Moreover, it will also result in an interest savings of approximately 100 basis points. As the credit market has normalized and funds are available at cheaper rates, it was prudent for the company to repay the high cost obligations.

The company in order to make a consumer’s shopping experience enjoyable is working on a new business model called RAC Acceptance. When the consumer is denied credit financing for a particular product from the retailer, Rent-A-Center, under its RAC Acceptance program, acquires that product from the retailer and offers it to the consumer under a rental-purchase transaction.

Rent-A-Center remains optimistic about its future growth as it opens stores in international markets and accelerates the rollout of RAC Acceptance kiosks.

Rent-A-Center offers consumer electronics, appliances and furniture products under rental purchase schemes that allow the customer to own the merchandise on the completion of the rental period. However, the sluggish recovery and a fragile job market may make customers reluctant to even enter new rental purchase deals.